More than 185,000 lifetime ISA (LISA) savers have been fined a collective £127m for making “unauthorised withdrawals” of their own money, according to a Freedom of Information request obtained by MPowered Mortgages.

The analysis by the lender comes at a time when helping people save for a home is a key focus for politicians in the approach to the July General Election.

LISAs were launched in April 2017 to help first-time buyers get on the property ladder or save for a pension. Savers get a 25% boost from the Government when they use the funds to buy a qualifying first home, and they are a tax-efficient way to save because the interest is tax-free.

Savers using a LISA can withdraw the money if they are buying a first home, are aged 60 or over or are terminally ill, but will pay an unauthorised withdrawal penalty of 25% of the withdrawal amount if they withdraw cash or assets for any other reason. Savers must pay the fine if they buy a home costing over £450,000 – a cap which has been frozen for seven years.

However, house prices have risen sharply since the £450,000 limit was introduced. Land Registry data shows that between April 2017 and March 2024, the average UK property jumped in value by 29.3%.

MPowered CEO, Stuart Cheetham, commented: “LISAs were created to help first-time buyers save up to buy a home, but thousands of savers are being unfairly penalised each year for doing just this.

“More than 185,000 people have already been fined to the tune of £127m for daring to withdraw their own money.

“The LISA withdrawal penalties are designed to ensure savers only use these accounts for what they are designed for – buying a first home or saving for retirement – but the cap on the value of property they can be used for means LISAs are increasingly unfit for purpose.”

The Freedom of Information request obtained by MPowered showed that more than £4bn is currently held in over a million LISA accounts.

More than a quarter of a million new accounts are opened every year, but since launch just 12% of account holders (171,050) have made a penalty-free withdrawal to buy a home – meaning 88% have either made no withdrawals or given up on the scheme and swallowed the penalty for breaking the rules.

MPowered has called for the next Government to urgently overhaul the “outdated” LISA rules, by index-linking the property price limit to take account of rising house prices.

“Forget reheating the failed Help to Buy scheme or tinkering with stamp duty, the next Government should act fast to reform the outdated LISA rules,” Cheetham added.

“While the LISA withdrawal restrictions are well intentioned, the property price cap needlessly penalises some savers for accessing their own money – it should be index-linked to reflect the rising tide of house prices.”

---